Inheritance tax when gift money has passed through 3rd party bank accounts

Reaper

We have a situation where grandparent A is taking money out of their savings account, putting it in a joint account with grandparent B, sending it to a parent who then puts it in the child's bare trust.

It's far from ideal but savings can often only be sent to a linked account and in this case the bare trust (bizarrely) will only take money from the trustees.

How much of a problem will this be if grandparent B dies? Is a letter saying the money is just passing through the other accounts to the intended end destination sufficient to avoid inheritance tax getting involved?

Keep_pedalling

 Are A and B married to each other?

Jeremy535897

I assume they must be, otherwise the money would just go from grandparent A to the parent? I assume this is intended to use up two lots of annual exemptions (two grandparents)? If so, the last thing you would want to do is to say ignore the transfer to the joint account. The facts need to be clarified, as I am not sure why the concern is only if grandparent B dies.

If the main issue is the intermediate use of the parent's beneficial account, a letter from A and B to the parent should suffice to show the fact that the parent always holds the cash as bare trustee for the child. This may also be relevant for income tax, as income arising to a minor child from capital provided by the parent remains taxable on the parent.

Reaper

Sorry I should have been more specific. Yes the grandparents are married and on death there will be inheritance tax to pay.

B is much more likely to die soon than A. So I was worried by passing it through a joint bank account half the money might be considered belonging to each of them resulting in a clawback on half the amount. Likewise as you say having passed through a parent's account last it might be considered a gift from the parent causing any income to be taxed (under the £100 rule)

I am hoping a letter saying the money is just passing through other  people's accounts would be sufficient to make it clear but I wasn't sure if that would be enough to satisfy the tax man.

Jeremy535897

I take it the amounts involved are outside the annual and other exemptions? I think that if money is moved from grandparent A into a joint account with a spouse, there is a risk that half will be treated as a gift to the spouse at that point. How much is involved?

Keep_pedalling

As married couples are free to transfer money to each other without any taxation issues to worry about, the gift could be considered as a joint gift or an individual gift from either. Treating it as joint doubles up the annual exemption to £6000. 

Reaper

Jeremy535897 said:

I take it the amounts involved are outside the annual and other exemptions? I think that if money is moved from grandparent A into a joint account with a spouse, there is a risk that half will be treated as a gift to the spouse at that point. How much is involved?

It is for school fees at a special school, so will exceed the annual gift allowances. Yes my concern is it will be treated as a gift to the spouse, and/or treated as a gift to the parents before finally arriving in the bare trust. I am hoping a letter stating it's end destination and a paper trail showing the money moving through the accounts will be sufficient to avoid liability but I don't know if it will work in practice.

Jeremy535897

With the appropriate letter, the gift from the grandparents' account to the child's account and onwards to the grandchild will be treated as a gift to the grandchild (but probably both grandparents could be treated as equal donors), but that may not be helpful, as I would be surprised if the contract with the school is not in the parent's name, and therefore the child is settling the parent's liability (which may raise legal problems). One option would be to change the contract into the name of grandparent A (or both grandparents). There is some discussion of inheritance tax here, including whether there could be use of the normal expenditure out of income exemption:
https://www.hcrlaw.com/blog/with-a-little-help-from-your-grandparents/

Inheritance tax is not a big issue, because unless the fees will be over the nil rate band, I don't think it matters which grandparent makes the gift, and whether it is a gift to the parent or the child, because:

• there is no tax on the gift
• if the donor dies within seven years, all it does is use up part of the nil rate band, and on the first death I would assume the estate is likely to be exempt (passed to survivor)
• the donee's estate (be that parent or child) does not increase as the money is spent on fees, and a parent does not make a gift for inheritance tax if they are paying for a child's education